SIE practice questioneasyInterest Rate Risk
Interest rate risk is the risk that:
- AA bond issuer will default on its payments
- BInflation will erode the purchasing power of investment returns
- CAn investment cannot be sold quickly at a fair price
- DRising interest rates will cause the market value of existing fixed-rate bonds to decline✓ Correct answer
Explanation
Why D — Rising interest rates will cause the market value of existing fixed-rate bonds to decline
Interest rate risk is the risk that changes in interest rates will affect bond prices. When rates rise, existing bonds with lower coupon rates become less attractive, and their prices fall. This risk is greatest for long-term, low-coupon bonds. Default risk (A) is credit risk, purchasing power erosion (C) is inflation risk, and difficulty selling (D) is liquidity risk.
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